Spanish Bailout Opens Can Of Worms

It was a long time coming but many independent economists and analysts were vindicating in their analysis of Spain. The bank bailout details have yet to be fleshed out but Bloomberg reports that the bailout Spain is looking for is €100 billion which is a staggering 10% of GDP. This is to be injected into the FROB, or the Fund for Orderly Bank Restructuring. There have even been reports of up to €250 billion is needed to shore up the banks.

Spain asked euro region governments for a bailout worth as much as 100 billion euros ($125 billion) to rescue its banking system as the country became the biggest euro economy so far to seek international aid.

Already Ireland is demanding the exact same deal. After accepting their original bailout deal in return for extreme austerity, it looks as if Spain is to escape that part. What a can of worms Germany has just opened as surely the Greeks will also demand similar treatment.

Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.

“Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF,” one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.

Another European government source confirmed the information.

Ireland secured an 85-billion-euro ($112 billion) rescue deal from the European Union and the International Monetary Fund in November 2010, but only after agreeing to draconian austerity measures.

Unlike Ireland, Spain’s economy minister said a deal on financing for the country’s troubled banks would not impose any conditions on the wider economy.

Where is the money to come from. The Germans have had problems ratifying the ESM, and the ESFS is looking a little bare.

The problem with this is that the ESM has yet to be ratified by Germany, whose parliament said previously it is sternly against allowing the ESM to fund a direct bank bailout, something which just happened. Thus, the successful German ESM ratification vote, whenever it comes, and which previously was taken for granted, now appears to be far more questionable.

Which leaves the EFSF. The problem with the EFSF is that there is about €200 billion in dry powder. And this includes the Spanish quota of €93 billion, which we can only assume is now officially scrapped.

As the economic hitmen make their way across the eurozone, its only a matter of time before Italy is next. Where then, does the money come from to bail them out as over €500 billion is already commited to the other PIIGS.

And ironically, what just happened, is that the Eurozone, with the tacit agreement of Germany, essentially gave insolvent banks a green light to short themselves into a full bailout.

How long until Italian banks get the hint, and proceed to short each other, or themselves, either with shares of stock or , better yet, through CDS which unlike in the sovereign case, can be held without an offsetting cash basis position. In other words: is it time for the Italian bank suicide trade?

Because only when they are on the verge of nationalization, will Italian banks be rescued. And remember: he who defects (or in this case drops the fastest), first, reaps the biggest benefits of the resultant action.